The AppleTV OS does not need the latest chip technology as it would be overkill.
It totally depends on what Apple wants the Apple TV to be.
The way it is right now, the Apple TV is an overpowered, but overpriced streaming box. The competitions' current devices have slower chips than the A10X in the ATVK1. So, you are right, as a streaming box, the latest chip would be overkill because the A10X and A12 is overkill.
If Apple wanted to seriously invest in gaming, this would justify more powerful HW, but I have my doubts Apple will ever do that.
But to your original question, does the Apple TV "sell well", you need to define what exactly you mean by "sell well".
If you mean compared to other streaming devices, then no, the ATV does not sell well at all.
If you mean does it sell well enough to generate a profit for Apple, then maybe, but only Apple would know for sure.
Perhaps a new model is all rumor is because Apple TV’s do not sell well.
The ATV4K2 was released a month after you posted this, so it obviously was not just a rumor, but I don't think that the ATV's marketshare has expanded much since the release.
I don't think an incremental HW update alone would be enough to increase sales, and since the ATV4K2 with the A12 is about on par with the original ATV4K with the A10X when it comes to power, I don't think that helped the marketshare either.
To get more marketshare, Apple will have to make the ATV special or unique, which right now, it really isn't that special, and there isn't too much about it to differentiate it from the competition. Much cheaper devices can do mostly what the ATV can do, but for much cheaper.
Apple will also have to do a lot more promotion and advertising. Compare the advertising for the Apple TV versus The Apple Watch or Apple TV+.
Apple hardly ever advertises the Apple TV, and most non-tech people have never heard of it.
Apple could also just concentrate on the streaming abilities of the ATV, and release a cheaper version.
Apple could go the opposite as well, and release a gaming-focused ATV, getting developers on-board early on for ports and exclusives. Maybe VR/AR as well.
The thing is, I don't think Apple cares about the ATV, nor tvOS. Maybe they crunched the numbers and determined that it just won't be worth the investment, or maybe they feel like it is too risky trying to compete in an already saturated market.
Apple had their chance at making the ATV the must-have entertainment box with the launch of tvOS back in 2015, and they really screwed it, losing any momentum and excitement for the platform. Apple has since shown a lack of interest in tvOS, and the few gaming developers that decided to give the tvOS a try has started to flee the platform.
Personally, I wouldn't be surprised if the current ATV4K2 will eventually be discontinued with no replacement.